Photo: Bloomberg TV
A point we’ve made several times in the past is that Quantitative Easing — because it’s seen as inflationary — actually causes rates to rise, contra the assumption of money that bond buying by the Fed depresses rates.In his note today, Jefferies’ David Zervos makes the same point, but using much more severe language…
The 10yr Treasury yield is back to unchanged on the year. And the 30yr Treasury yield is now UP almost 20bps on the year. At the same time the Fed has introduced a $200b+ second round of operation twist, and an unlimited third round of quantitative easing. The Fed has spent 2012 telling us they are going to buy more duration – in fact, unlimited duration – but the 30yr Treasury yield is higher!!
Conventional wisdom suggests that when the Fed takes duration out of the market, bond prices are supposed to rise. Even our fearless Colonel Bernanke tells us he is lowering interest rates. But that’s not happening. Is he lying? Absolutely!! Has the myopic Treasury trading community completely misunderstood how QE affects bond yields? Absolutely.
In an email with Zervos, we asked him what he thought was the #1 risk to the market right now.
Rather than answer by saying what he thought would hurt risk assets (which was our intended question) Zervos answered:
Number 1 risk is that people don’t have enough exposure to risk assets. Central banks are printing and people who own government bonds are going to see their wealth diluted.
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